If you can’t manage the flow of cash in your business, your business is out of control. Control the cash flow and you’ll control your business. I hear new clients talk about not having enough money to make payroll, that’s a cash flow management problem. That’s different from profit. Many businesses have shut down, even though they had a profit on paper, because they had poor cash flow.
It doesn’t matter how big your company is, or how fast your profit (or sales) are growing. If the money isn’t there when you need it, you’re history. So the first step is to understand that profit, as represented on your Profit & Loss statement is a static number. Think of it as a sort of history lesson. By examining your P&L, you will only understand where you’ve been. Cash flow on the other hand, is dynamic, ever changing and always on the move. If profit is like reading the newspaper, cash flow is like watching a movie.
Your P&L tells you how much money you’re spending and receiving and where you’re doing that. Cash flow tells you the same thing, and also when you’re spending and receiving it, or can expect to spend and receive it. That’s the key difference. Forecasting when this flow in and out of your business happens, or will happen, is what a cash flow statement does. A successful business is great at forecasting and also at efficiently managing the flow in and out.
Here’s an example of inefficient, or poor flow management: your customer owes you money on net 15 terms. On day 25, the money hasn’t arrived, on day 30 you send out a statement, on day 45 half the money comes in, on day 60 you send out another statement, and so on.
Managing for profit requires that you pay attention to your pricing strategy, gross margin and overhead expenses. Managing for great cash flow is an attention to the details of timing. Knowing where and when your money is flowing it crucial to beginning to understand how to control the flow.